Morgan Stanley Adjusts Sector Recommendations in Europe

Morgan Stanley made adjustments to its sector recommendations in Europe, downgrading the energy and automotive sectors while upgrading real estate and diversified financials to overweight in a note on Thursday.

Energy Sector Downgrade

According to Morgan Stanley, the energy sector has been downgraded from equal-weight to underweight due to:
– Expected peak crude oil market tightness
– Resumption of OPEC and non-OPEC production growth after Q3
– “Fully valued” TTF and LNG prices

The energy sector’s position in Morgan Stanley’s model has dropped significantly, reflecting:
– Positive bond yield correlation
– Weak earnings trends
– Low pricing power

Automotive Sector Downgrade

The automotive sector has also been downgraded to underweight. Analysts noted, “Autos was already a borderline Underweight at our last model update (19th place of 28 sectors) but has dropped further to 26th place.” This downgrade aligns with the cautious view of the firm’s sector analysts.

Upgrades for Real Estate and Diversified Financials

In contrast, Morgan Stanley upgraded the diversified financials (DivFins) and real estate sectors to overweight from equal-weight. The firm’s new model components favor bond yield-sensitive stocks, benefiting both sectors.

Diversified Financials

The upgrade for DivFins is supported by:
– Improving management sentiment
– Continued strong idiosyncratic momentum
– A deceleration in employee changes

Real Estate

Real estate benefits from:
– Strong idiosyncratic momentum
– High exposure to mergers and acquisitions
– No longer penalized for high leverage under the new model.